Key Takeaways
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An appraisal gap occurs when the home’s appraised value is lower than the purchase price.
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Lenders finance only the appraised value, so buyers must address the gap.
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Options include paying the difference, renegotiating, or disputing the appraisal.
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Appraisal gap coverage and contingencies can help protect buyers in competitive markets.
When buying a home, two numbers matter most: the agreed purchase price and the appraised value set by a licensed appraiser. Ideally, these numbers align. However, in today’s competitive housing market, buyers often face an appraisal gap—when the appraisal comes in lower than the purchase price. This guide explains what an appraisal gap is, why it matters, and how to handle it without losing your dream home.
What Is an Appraisal Gap?
An appraisal gap occurs when the appraised value of a property is lower than the agreed-upon sales price. Since lenders base mortgage approval on the appraisal—not the purchase price—the difference can create financing challenges.
| Term | Meaning |
| Purchase price | Amount buyer and seller agree upon for the home |
| Appraised value | Value determined by a licensed appraiser for the lender |
| Appraisal gap | The difference between purchase price and appraised value |
Example: If you agree to buy a home for $350,000 but the appraisal comes in at $310,000, you face a $40,000 appraisal gap.
How to Handle an Appraisal Gap
Buyers have several options to move forward:
1. Pay the Difference
Cover the gap out of pocket using cash savings, investments, or secondary financing. Some lenders may allow a reduced down payment or require private mortgage insurance (PMI) to help balance the difference.
2. Renegotiate With the Seller
If your purchase contract includes an appraisal contingency, you can renegotiate. Sellers may agree to lower the price or split the difference to keep the deal alive.
3. Dispute the Appraisal
If you believe the appraisal is inaccurate, request a reconsideration of value or order a second appraisal. While not always successful, this strategy can work if errors or overlooked comparable sales exist.
Appraisal Gap Coverage and Contingencies
Many buyers now use appraisal gap coverage in competitive markets. This clause allows the buyer to commit to covering a set amount above the appraised value.
Example: A buyer agrees to pay up to $10,000 above the appraised value. If the gap is larger, the buyer can walk away if they included an appraisal contingency.
Meanwhile, an appraisal contingency gives buyers the legal right to cancel the contract and recover earnest money if the appraisal is too low.
Is This a Deal Breaker?
Not necessarily. While this can feel discouraging, it doesn’t mean your purchase is doomed. With the right preparation—whether covering part of the difference, negotiating with the seller, or using appraisal gap coverage—many buyers overcome this challenge successfully. The key is working closely with a knowledgeable real estate agent and lender who can guide you through your best options.
FAQs About Appraisal Gaps
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